So you want to start trading stocks—great! Investing is one of the best ways to maximize your hard-earned money. But it's not as simple as just putting money in. Before you consider any type of investment or investment strategy, it's essential to educate yourself and assess your options. Here are some preliminary steps to get you started on your investment journey:
Note: The investment advice offered may not be suitable for all investors. As everyone has different ideas on how they would like to invest their own wealth, you should always seek an independent financial advisor to get tailored advice for your own situation, especially if you have any doubts as to the merits of an investment.
#1 Open a brokerage account
A good first step to take is to open a brokerage account with an online stock brokerage. When scouting for which one to go with, there are a few factors to consider, such as whether there are trading commission fees (note that most online brokerages offer free trading), how easy the app or website is to follow, and what tools they provide to help guide you through the process.
Luckily for traders, there are several options available. You could apply to established companies like Fidelity and Charles Schwab, which have decades of expertise linked to their trading tools. Or, you could go with a newer company such as Robinhood or WeBull, which focuses more on improving user experience. Ultimately, it's your choice and your preference—research wisely to make an informed decision.
#2 Conduct research on stocks
Once you have a brokerage account set up, you can start buying stocks. But where do you even start? For new traders, it can be quite overwhelming to pick individual stocks. A good way to ease yourself into the process is to purchase exchange-traded funds or ETFs. ETFs allow investors to buy a bundle of stocks at once so you don't have to deal with the tug-of-war of choosing between one company and another.
If you end up deciding to invest in individuals stocks, you should always refer to some financial analysis ratios to determine how well a company performs in comparison to its contemporaries. You should only want to add the best stocks to your portfolio, and examining those ratios will help you make better decisions on which companies to go with.
#3 Deciding on trade orders
There are different types of trade orders to consider when you want to buy or sell a stock. Market orders and limit orders are the two most basic types—the former goes through right away for the best price, while the latter does not go through right away but offers a greater say in the price you buy or sell at.
If you want to play it safe, you could place a trailing loss stop order, which helps you lock in the profits and keep up with potential gains until the trade starts to turn on you. The moment the security price falls to a set maximum value of a loss, it is automatically sold.
#4 The cost of trading
Stock trading comes with expenses, with trading commission fees being the most common. Luckily, most brokerages offer free trading, so you will likely not incur any charges for your trading activities. However, if you are interested in investments such as ETFs and mutual funds, you will have to pay a certain percentage to the person or group who manages the funds. These are called expense ratios.
Additionally, you will need to determine your risk tolerance. As a rule of thumb, high risk will typically mean high rewards, so long as the market is working in your favor. At the same time, during periods of poor market performance, high risk can also mean high losses.
What you decide to do after experiencing losses can help you figure out your risk tolerance. If, after the losses, you would still buy more in hopes of a market rebound offsetting those losses, you have more aggressive risk tolerance. If, after the losses, you would rather pull out and sell, you have a more conservative risk tolerance and should probably look at safe investments instead.
If you do plan to go aggressive with your investments, it is always recommended that you have an emergency fund to fall back on.
#5 Trading stocks and taxes
When you've made money off of your stocks and you'd like to trade them for profit, you will have to pay taxes on those profits. Those taxes are called capital gains taxes, and they are designed to encourage investing in stocks for the long-term. Usually, you have to pay capital gains taxes when you hold onto a stock for less than a year, and such taxes are lowered for any period greater than a year.
When you sell your stocks for a loss, you will pay lower taxes under the "wash sale rule." This rule is best explained in an example: If you sell a stock for a loss, and then within 30 days you repurchase that same stock, your loss will no longer give you tax benefits as the loss will be accounted for once you sell the stock again.
#6 How to trade a stock
To place a trade on a stock, you must first add funds to your brokerage account. Depending on your brokerage, these funds are transferred either right away or they may take a few days to process. Once you see the funds in your brokerage account, you just need to select the stock you'd like to trade, pick an order type, and place the order.
Remember, market orders should process immediately, while limit orders may take longer. If you want to try speeding up the processing of a limit order, you can try to move your limit price closer to the asking price (if you are buying) or the bid price (if you are selling).
#7 Advanced strategies
Newbie traders should continue practicing with simple buy and sell trades until they are completely comfortable with them. After mastering those, they can then move onto more advanced strategies, such as trading on margin or short selling.
Trading on margin involves borrowing money from your brokerage to trade stocks. While this is can allow you to rapidly grow your portfolio, it is also incredibly risky. The money you are using is no longer your own money but the brokerage's, so there is a high level of accountability on your end to deliver, as well as a high risk of landing in debt.
Short selling is another advanced strategy. The trader sells the stock first, then buys it back later at a cheaper price when the stock falls. Profits off of short selling only happen if the stock is falling—increases in stock price are unfavorable for short sellers because that would mean they would need to buy the stock back at a higher price than what they initially sold it for.
Robo-advisors are another way to invest your money. They are app-based investment services that rely on algorithms to automate investment decisions. Should you not feel comfortable diving into the market, a Robo-advisor may be a worthwhile option for you.